This is the fourth of five articles on the upcoming changes to unfair dismissal rules and their impact on professional service firms.
What is changing
From 1 January 2027, the statutory cap on the compensatory award for unfair dismissal will be removed. The current cap is the lower of a monetary ceiling and 52 weeks’ gross pay. The reform removes that ceiling, but it does not turn compensation into a penalty or guarantee a large award.
Tribunals will continue to assess actual and projected financial loss caused by the dismissal. Claimants must evidence loss and are expected to take reasonable steps to mitigate it, for example by seeking suitable work. Basic awards remain a separate element.
Why the change matters in professional services
Professional services firms employ people whose remuneration may include salary, bonus, commission, pension contributions, private medical cover, car allowance and other benefits. Senior professionals may also have lengthy notice periods and specialised experience that narrows the market for comparable roles. Those features can increase projected loss if a dismissal is found unfair.
The absence of a cap may be especially relevant where earnings exceed the former ceiling, a bonus cycle has been interrupted, regulatory or reputational consequences affect re-employment, or a niche specialist faces a long job search. The value of each claim will remain fact-sensitive, but the previous ceiling will no longer provide the same reference point for settlement discussions or reserves.
Separate employee rights from ownership rights
In partnerships and professional firms, senior individuals may hold several legal relationships at once. An individual might be an employee, shareholder, member of an LLP, bonus participant or candidate for partnership. Ending employment may trigger consequences under incentive, share or membership documents as well as employment law.
Firms should analyse each layer rather than assume that a leaver provision answers the unfair dismissal question. Conversely, not every commercial loss will necessarily be recoverable as unfair dismissal compensation. Causation, contractual terms, mitigation and the tribunal’s statutory framework will remain important.
Insurance, reserves and settlement authority
Risk governance should be revisited before January. Employment practices liability or legal expenses policies may include notification requirements, panel arrangements, exclusions, limits or consent provisions. The policy wording should be checked rather than assuming that an uncapped statutory award is fully insured. Please speak with our team if you have concerns about the level of cover your firm currently has.
Internal settlement authority may also need adjustment. A rigid matrix based on salary multiples or the former statutory cap may understate exposure in a senior case and overstate it in a case where re-employment is likely. A better assessment models probable earnings loss, benefits, bonus evidence, mitigation prospects, litigation cost and management time, then applies a realistic merits analysis.
Procedure remains the best control
Removing the cap increases the consequence of an unfair decision; it does not change the fundamentals of fair dismissal. Firms should identify a potentially fair reason, investigate appropriately, communicate the case, allow a meaningful response, consider alternatives and offer an appeal where the circumstances require it.
For senior employees, governance is particularly important. Decision-makers may be close to the underlying dispute or commercially invested in the outcome. Conflicts should be identified, authority checked and records kept of the evidence and reasoning. Privileged legal advice should be managed carefully, while the non-privileged decision record remains capable of standing on its own.
A more disciplined valuation approach
Before settlement discussions, create a loss schedule using known remuneration and evidence-based assumptions. Test alternative re-employment dates, likely bonus outcomes and benefits, and update the model as evidence changes. Do not treat the removal of the cap as a reason to settle every claim, but do treat it as a reason to value claims properly.
For boards and management committees, the key message is that unfair dismissal exposure becomes less predictable at the top end. Good data, sound process and early strategic advice will be the most effective controls.
Questions for leadership
Boards should ask whether high-value employment disputes appear on the same risk radar as major client, regulatory or professional indemnity issues. They should understand who can authorise settlement, when insurers must be notified and how potential loss is modelled. They should also ensure that remuneration records are sufficiently clear to assess bonus, commission, pension and benefit claims without reconstructing the package after litigation has started.
Practical next step: Update settlement authority and litigation reserve protocols so that senior remuneration, bonus, pension and long job-search periods are assessed expressly rather than by reference to the former cap.
Please contact our Employment Team on 0345 646 0406 or fill in our online enquiry form and we will be more than happy to help.